April 8th Weekly Recap

Savant Report Week End Summary

STOCKS, BONDS, AND BEARS…OH MY:
Capital is leaving the stock market in big waves. And where the capital is heading, you wouldn’t believe – bonds.

Since January, we’ve seen an inflow of capital from the sidelines (aka under the mattress), but we’ve also seen institutional capital pulling incredible amount of funds out of the stock market and putting it into bonds. This is mostly on speculation that one of several events will drive higher bond prices and lower yields, such as:

A recession will drive capital into bonds as a safe haven; or

Negative interest rates will inflate the bubble of bonds even further

I’m happy on the short view of the S&P – patiently waiting for the downward break or the slow “spring melt” that technically appear to be taking hold in the stock market.

The precursor to most pullbacks in the economy come from the financial sector. This week, global banks underperformed the market by 18%, a new low for the S&P Bank Index Vs. S&P500 relative performance:

I’m definitely not an advocate for doom and gloom, but the big money that is exiting banking is smelling something that they don’t like. This should tip us all off that something is brewing, if nothing else, the financial regulation that could continue to crush banks after the horrendous Dodd Frank act was passed…The effects of which we’re still learning about. All of this on the backdrop of the Fed trying to figure out when and how much to raise interest rates. As reported earlier, the macro conditions aren’t favorable for higher real interest rates, and the macro capital flows are keeping them pretty low still with bond buying binges in the billions.

Nearing zero, aren’t we? How this technical chart unfolds will tell us whether there is room for sustained low rates, or if we’re doing to gently fade higher.

Bond inflows and equity outflows tell a lot of stories, especially in banking as noted above. One area that the U.S. has constantly been waiting to bust is the student loan bubble. A new survey shows that about 43% of student loans were either delinquent or had payments postponed. Getting ready to short Sallie Mae?

The problem with trying to time the student loan bubble is the same challenge trying to time markets…The markets can be wrong longer than you can stay solvent. For years now, people have been calling the student loan market a “bubble.” And I agree, it is. However, that piper will not get his payment until we have a fiscally responsible POTUS or Bernie Sanders gets elected and virtually bankrupts the system and forgives all debts…Both scenarios result in a big bubble pop. Timing would be uncertain. However, anything in between those two extremes (aka Hillary Clinton or Ted Cruz) may delay the inevitable in the student loan market. When you consider that student loan debt is $1.2 TRILLION dollars, that’s enough to make you nervous. Now consider that probably 60% or better of those “graduates” studied nonsense majors and have more holes in their faces than they do years in the workforce…And its all but horrific. Millions of hard working Americans who worked multiple jobs to pay off student loan debt are now carrying the weight of those who have no work ethic, skill sets, or plans to pay off the debt other than going to Bernie Sanders rallies. Not trying to be political, but this $1.2 TRILLION problem is knocking on the door of disaster. Even low interest rates don’t fix the student debt problems.

The part of our economy known as Gen Y or “Mille nails” is about to create another banking crisis. While savings rates among income earning adults is on the rise, student loans, credit cards and auto-debt is on the rise in a big way.

The “subprime” auto loans are comprised, in part, of millennials with little or not income documentation or job history. The Gen X and older crowd, as you can see, are hell bent on reducing their auto related debt burdens.

Let me ask you a rhetorical question: If you imagined how hard it is for millennials to make their subprime auto loan payments, credit card payments on 5.7% increasing debt balances and student loans (for those that are paying…How hard do you think it would be for them to make those payments if real interest rates rose 150 bps or more? That’s right…About impossible. So, low rates are the flavor of this season in the cycle, no doubt.

Speaking of interest rates, last week, I showed you a survey chart showing what traders thought the probability of a rate hike was in April, which was about 5%. Now take a look at this chart, with about 40% of the survey implying 0 hikes in 2016, and about 40% saying they may be one rate hike, with a small minority projecting 2 or 3 hikes. Low rates are here to stay for a while.

EMPLOYMENT:
Some good news from the U.S. employment sector…Finally, labor force participation rate looks like it has bottomed…FINALLY.

Growth in the U.S. Labor force finally exceeded the population growth:

WORLD:
Problems around the world persist. Greece, who I really would love to see as a great turn around story, is still fighting catastrophic levels of unemployment:

China is also getting ready to ravage the commodity world AGAIN with copper export numbers…

And if China’s problems were big enough, they are starting to see business debt default at staggering rates…

As bad loan balances at China’s banks rise, Beijing is implementing a debt for equity swap at the nation’s lenders. Banks will convert nonperforming loans into shares of the borrowers. Inefficient firms who are unable to pay their debt will thus be allowed to continue rather than going into bankruptcy. Other than shedding debt and changing owners, these businesses are unlikely to be restructured, resulting in moral hazard.

What continues to baffle me beyond what words I can muster to express my disbelief, is how China’s real estate (housing) market is showing signs of recovery, when it should be continuing to fall:

I continue to caution all international real estate investors to stay away from real estate in China, Australia, and Canada. Beyond the bounces and continued increases in some areas, common sense has to play a part in realizing that no matter what values do short term, long term risk is a hefty price to pay for what is already an overvalued marketplace. This is referred to as a “bull trap’s return to normalcy.”

As an investor, I realize that investing has as much to do with psychology as anything else. Psychology is impossible to time. People can remain irrational for a lifetime. So the better bet than taking a short position, is to buy value when and where value is present. There is virtually no fundamental or technical reason for either China real estate or Australia real estate would do anything but sink. So instead of arguing with people paying prices that make no economic sense whatsoever, I choose to stay on the sidelines and wait for the value buy.

MY BOTTOM LINE:

EQUITIES/STOCKS: This week, I remain in a short view for the equities markets. No, I’m not a perpetual bear… I just call it like I see it.

STUDENT LOANS: The bubble is real, but there really isn’t a viable way to time it, and politics will play a big role in that bet, short or long…

INTEREST RATES & BONDS: It would not surprise me in the least to see a rally in bonds, nor a firm hold for this year in rates or possibly one single raise from Janet Yellen.

CHINA: Still screwed.

RECESSION: Still a possibility for 2016-2017…The bank stocks may be the first indication of trouble brewing from this point forward.

COMMODITIES: Well, you can see copper is in for a long haul on the bearish side of the train. Generally speaking, I don’t see any reason to be bullish anything in commodities.

REAL ESTATE: BUY U.S. REAL ESTATE!!! SELL ALL FOREIGN REAL ESTATE. That’s my view, and I’m sticking to it. You’ll note that I don’t talk too much about real estate in the Savant Reports. There are two reasons for that. (1) That is my primary business, and I don’t want the Savant Report to come across as a “sales pitch” for my investment company. (2) Not much changes in real estate week to week, so there is little news during the week except for interest rates.

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